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Companies seeking new tax guidance from the Treasury Department may be in for a long
wait.

The department is putting 2016 guidance under the microscope under orders from the
White House, and may soon be devoting much of its energy to tax reform—both potential
roadblocks for anything new, tax attorneys told Bloomberg BNA.

There’s no doubt both of those are shrinking the resources Treasury can devote to
new guidance, they said. And that may make tax compliance difficult.

“This is a big deal,” Thomas Linguanti, a partner with Morgan Lewis &
Bockius LLP, said. “Taxpayers are in this world of uncertainty. They’re looking for
anything they can hold on to while they’re trying to run their businesses. It’s a
very difficult time.”

Manufacturing Credit Critical

Attorneys said three big areas on which they’re hoping for guidance include the manufacturing
tax credit under tax code Section 199, the partnership audit rules under the Bipartisan
Budget Act, and rules on foreign currency gains and losses under Section 987.

Both Robert Kovacev, a partner with Steptoe &
Johnson LLP, and Daniel Rosen, a partner with Baker & McKenzie LLP, said proposed
rules (REG-136459-09) under Section 199—caught up in a January government-wide freeze
on regulations—are a major source of concern for their clients.

Issued in August 2015, the rules restrict companies using contract manufacturers from
taking a tax deduction for producing goods domestically—a position that has caused
a continuing outcry in the business community and led to five members of Congress
sending a July 25 letter to Treasury Secretary Steven Mnuchin urging him to withdraw
parts of the rules.

Use of Internal IRS Guidance Rising

Rosen said in the absence of final rules, “taxpayers are left to fend for themselves.”
As audits proceed, he said, the lack of formal regulations has caused both companies
and Internal Revenue Service agents to rely on less-formal internal IRS guidance.

This would include chief counsel advice memorandums and other guidance that doesn’t
provide any kind of formal precedent for IRS actions on the issue.

Action on proposed rules to implement a new partnership audit regime (REG-136118-15)
is more likely, with the regime taking effect in 2018 and the IRS scrambling to get
final rules out. An IRS hearing is scheduled for mid-September.

Foreign Currency Rules

John Harrington, a partner with Dentons US LLP, said Treasury needs to take quick
action to delay the Section 987 foreign currency rules. Although the guidance is among
eight projects targeted for repeal or modification as part of the Treasury review
process, Treasury won’t announce its recommendations until September.

Harrington said compliance with the existing rules is so difficult that Treasury needs
to act swiftly.

A Treasury spokeswoman declined to comment.

In addition to the two overall issues that may be holding up new rules—the review
of 2016 guidance and the possibility of tax reform—practitioners and former Treasury
officials said a big reason for the delay may be the department’s lack of senior tax
officials.

Movement on guidance may be more likely under new Treasury Assistant Secretary for
Tax Policy David J. Kautter, but Mark Mazur, who held Kautter’s position under former
President Barack Obama, said more people are needed.

Political Staff Needed

With no one filling the jobs of Treasury tax counsel and international tax counsel,
among others, “the big problem is not having the appropriate political staff,” said
Mazur, now director of the Urban-Brookings Tax Policy Center.

Another potential holdup, according to several practitioners interviewed by Bloomberg
BNA, is a heavy procedural burden where rule-writers have to make sure regulations
meet the requirements of the Administrative Procedure Act.

Both Linguanti and Michael Desmond, a former Treasury tax legislative counsel now
in private practice in Santa Barbara, Calif., said IRS court losses under the
APA have spelled a slowdown of regulations as the agency tries to make sure it explains
its response to all comments it receives.

Taxpayers Going Ahead

As Treasury and the IRS struggle to “un-stick”
guidance now in the pipeline that practitioners want to see, Linguanti said some taxpayers
are deciding they can’t wait any longer.

In the absence of guidance, Linguanti said, some companies are going ahead with business
decisions as the end of the tax year approaches, and “we’re going to see more of that.”

Meanwhile, a lawsuit is simmering against an executive order calling for agencies
to pull two rules for every new one they want to write, based on cost and burden.

Lawsuit Simmering

Public Citizen, a liberal activist group, is suing President Trump over the executive
order, asserting Trump doesn’t have the right to force agencies to pull rules that
Congress ordered them to write (
Pub. Citizen, Inc. v. Trump, D.D.C., No. 1:17-cv-00253, hearing
8/10/17
).

“We think it’s unconstitutional,”
said Allison M. Zieve, the Public Citizen attorney who is handling the case.

She said the administration hasn’t made clear which rules it is planning to pull,
leading to a potential “shadow”
regulatory regime. The group is asking the U.S. District Court for the District of
Columbia to declare that the order can’t be lawfully implemented and to bar the agencies
from implementing it.

The court held a hearing on the case Aug. 10 but Zieve said there is no way to tell
how long it might be before it issues a formal opinion.

To contact the reporter on this story: Alison Bennett in Washington at
abennett@bna.com

To contact the editor responsible for this story:
Meg Shreve at
mshreve@bna.com

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